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Economic Factors Affecting the Workers Compensation Market:
An Overview and OutlookWorkers Compensation Educational Conference
Orlando, FLAugust 21, 2012
Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
2
Growth Will Expand Workers Comp Payroll Exposure Base
2
America’s Manufacturing Renaissance?Construction Activity Still Depressed?
3
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/12; Insurance Information Institute.
2.7
%0
.5%
3.6
%3
.0%
1.7
%-1
.8%
1.3
%-3
.7%
-5.3
%-0
.3%
1.4
%5
.0%
2.3
%2
.2%
2.6
%2
.4%
0.1
%2
.5%
1.3
%4
.1%
2.0
%1
.5%
1.7
%1
.9%
1.8
%2
.4%
2.7
%2
.9%
-8.9%
4.1
%1
.1%
1.8
%2
.5% 3.6
%3
.1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
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:3Q
08
:4Q
09
:1Q
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:2Q
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:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
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:2Q
11
:3Q
11
:4Q
12
:1Q
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:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing
slump, labor market contraction has been
severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2012 is expected to see slow and choppy growth
before accelerating modestly in 2013
Percent Change in Real GDPby State, 2011
Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 4
Growth varied considerably across states
but in total was weak in 2011
with US overall growth at just
1.7%
TX has been an economic
growth leader
74
.4
73
.6
73
.6
72
.2
73
.6 76
67
.8
68
.9
68
.2
67
.7 71
.6 74
.5
74
.2 77
.5
67
.5 69
.8
74
.3
71
.5
63
.7
55
.7 59
.4
60
.9 64
.1
69
.9
75
.0
75
.3
76
.2
76
.4 79
.3
73
.2
72
.3
73
.6
40
45
50
55
60
65
70
75
80
85
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
Consumer Sentiment Survey (1966 = 100)
January 2010 through August 2012
Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and early 2012
Source: University of Michigan; Insurance Information Institute
Optimism among consumers Increased in August, and is well above year-ago levels; Suggests concern, but not fear on the part
of consumers.
5
6
16.9
16.5
16.1
13.2
10.4
11.6 12
.7
14.3 14
.7
14.7 15
.1
15.4
15.5
15.4
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-22F
(Millions of Units)
Auto/Light Truck Sales, 1999-2022F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is
still far below 1999-2007 average of 17 million units, but a recovery is underway.
Job growth and improved credit market conditions will boost auto sales in
2012 and beyond
7
(Millions of Units)
New Private Housing Starts, 1990-2022F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
1 0.7
5 0.8
9
1.3
4
1.2
3
1.3
2
1.3
81
.42
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F 18-22F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged
72% from 2005-2009; A
net annual decline of 1.49 million units, lowest since
records began in 1959
The plunge and lack of recovery in homebuilding and in construction in general
is holding back payroll exposure growth
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
8
Construction Employment,Jan. 2010—July 2012*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,59
3
5,52
9 5,55
2
5,55
9
5,51
8
5,50
7
5,49
1 5,51
1
5,49
2
5,49
9
5,48
8
5,47
7
5,45
6
5,48
9
5,49
6
5,49
5
5,49
8
5,49
5
5,50
8
5,49
8
5,52
8
5,51
9
5,52
0 5,54
6 5,56
4
5,56
3
5,54
9
5,54
2
5,51
0
5,51
4
5,51
3
5,400
5,450
5,500
5,550
5,600
5,650
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
2/30
/210
2
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Construction employment is still below where it was in
Jan. 2010. In a normal recovery, construction employment would be
growing robustly
(Thousands)
9
Value of Construction Put in Place, June 2012 vs. June 2011*
-3.7%
-27.5%
-2.9%
7.0%
13.1% 12.1% 14.0%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
TotalConstruction
Total PrivateConstruction
Residential--Private
Non-Residential--
Private
Total PublicConstruction
Residential-Public
Non-Residential--
Public
Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue
Growth (%)
Private sector construction activity is up in both the residential and nonresidential segments
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +13.1% Public: -3.7%
Public sector construction activity remains depressed
10
Value of Private Construction Put in Place, by Segment, June 2012 vs. June 2011*
6.6% 7.0%
18.8%
-10.5%
-5.2%
17.1%
-1.7%
26.5%
19.0%
13.1% 12.1%14.0%
26.3%
6.6%
-15%-10%
-5%0%5%
10%15%20%25%30%
To
tal
Pri
vate
Co
nstr
ucti
on
Resid
en
tial
To
tal
No
nre
sid
en
tial
Lo
dg
ing
Off
ice
Co
mm
erc
ial
Healt
h C
are
Ed
ucati
on
al
Reli
gio
us
Am
usem
en
t &
Rec.
Tra
nsp
ort
ati
on
Co
mm
un
icati
on
Po
wer
Man
ufa
ctu
rin
g
Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power
Growth (%) Led by the Power industry, Private sector construction activity is up by double digits in many segments after
plunging during the “Great Recession”
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
11
Value of Public Construction Put in Place, by Segment, June 2012 vs. June 2011*
-6.0%-5.8%
0.0%4.4%
0.2%4.0%
-2.3%-2.1%
-18.8%-22.7%
-3.7%
-27.5%
-2.9%
-12.7%
-17.8%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
To
tal
Pu
bli
cC
on
str
ucti
on
Resid
en
tial
To
tal
No
nre
sid
en
tial
Off
ice
Co
mm
erc
ial
Healt
h C
are
Ed
ucati
on
al
Pu
bli
c S
afe
ty
Am
usem
en
t &
Rec.
Tra
nsp
ort
ati
on
Po
wer
Hig
hw
ay &
Str
eet
Sew
ag
e &
Waste
Dis
po
sal
Wate
r S
up
ply
Co
nserv
ati
on
&D
evelo
p.
Public Construction Activity is Up Down in Many Segments as State, City and County Budgets Remain Under Stress
Growth (%)
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Public sector construction activity is down by
substantially in many segments
58
.3
57
.1
60
.4
59
.6
57
.8
55
.3
55
.1
55
.2
55
.3 56
.9 58
.2
58
.5 60
.8
61
.4
59
.7
59
.7
54
.2 55
.8
51
.4 52
.5
52
.5
51
.8
52
.2 53
.1 54
.1
52
.4 53
.4 54
.8
53
.5
49
.7
49
.8
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through July 2012
The manufacturing sector expanded for 34 consecutive months until June 2012 and added jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing activity contracted in June for the first time in nearly 3
years, but a resumption of expansion is possible
12
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Jun 0
1
Sep 0
1
Dec 0
1
Mar
02
Jun 0
2
Sep 0
2
Dec 0
2
Mar
03
Jun 0
3
Sep 0
3
Dec 0
3
Mar
04
Jun 0
4
Sep 0
4
Dec 0
4
Mar
05
Jun 0
5
Sep 0
5
Dec 0
5
Mar
06
Jun 0
6
Sep 0
6
Dec 0
6
Mar
07
Jun 0
7
Sep 0
7
Dec 0
7
Mar
08
Jun 0
8
Sep 0
8
Dec 0
8
Mar
09
Jun 0
9
Sep 0
9
Dec 0
9
Mar
10
Jun 1
0
Sep 1
0
Dec 1
0
Mar
11
Jun 1
1
Sep 1
1
Dec 1
1
Mar
12
Jun 1
2
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 13
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
The US operated at 79.3% of industrial capacity in July
2012, above the June 2009 low of 68.3% and tied for the
highest level since April 2008
December 2007-June 2009 Recession
March 2001 through July 2012
13
14
Manufacturing Employment,Jan. 2010—July 2012*
11,4
58
11,4
62
11,4
70
11,5
02
11,5
36
11,5
46
11,5
66
11,5
49
11,5
51
11,5
51
11,5
60
11,5
75
11,6
27
11,6
64
11,6
90
11,7
18
11,7
26
11,7
38
11,7
68
11,7
71
11,7
68
11,7
77
11,7
80
11,8
08
11,8
60
11,8
90
11,9
32
11,9
42
11,9
55
11,9
65
11,9
90
11,000
11,200
11,400
11,600
11,800
12,000
12,200
12,400
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
2/30
/210
2
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Manufacturing employment is up by more than 500,000 or 4.6% since Jan. 2010—a
surprising source of strength in the economy
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)
16
Manufacturing Growth for Selected Sectors, 2012 vs. 2011*
11.2%
3.8%
12.1%
3.0% 3.6%5.6%
-0.1%
6.5% 5.3%5.8%9.1%
6.6%
20.9%
6.5%
-5%
0%
5%
10%
15%
20%
25%
All
Ma
nu
fact
uri
ng
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ryM
eta
ls
Fa
bri
cate
dM
eta
ls
Ma
chin
ery
Ele
ctri
cal
Eq
uip
.
Tra
nsp
ort
atio
nE
qu
ip.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stic
s &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods has been
especially strong in 2012
*Seasonally adjusted; Date are YTD comparing data through June 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Durables: +9.1% Non-Durables: +3.0%
50
.7 52
.7 54
.1
54
.6
54
.8
53
.5
53
.7
52
.8 53
.9
54
.6 56 5
7.1 5
9.4
59
.7
56
.3
54
.4
53
.3
53
.4
53
.8
52
.6
52
.6
52
.6
52
.6
53
.0
56
.8
57
.3
56
.0
53
.5
53
.7
52
.1
52
.6
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through July 2012
Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers was
stable in late 2011 and increased in early 2012
17
18
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
5371
,549
70,6
4362
,304
52,3
7451
,959
53,5
4954
,027
44,3
6737
,884
35,4
7240
,099
38,5
4035
,037
34,3
1739
,201
19,6
95 28,3
2243
,546
60,8
3756
,282
47,8
0610
,998
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112
:Q1
Business Bankruptcy Filings,1980-2012: Q1
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more
than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
18
19
Private Sector Business Starts, 1993:Q2 – 2011:Q4*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
1
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
209
207
207
199
191 19
317
2 176
169
184
175 17
918
820
018
3 187 19
119
7
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly* Data through Dec. 31, 2011 are the latest available as of Aug. 20, 2012; Seasonally adjusted.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up 5.0% to 758,000 in 2011. 722,000 new business starts were
recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new
business starts since 1993
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 758,000*
19
20
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking)
21
Oil & Gas Extraction Employment,Jan. 2010—June 2012*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156
157
157
158 159
158
158 16
0
160 16
2
161
161 16
3 164 16
7 170 17
1 173 17
5 177 18
0 183
183 18
6 188 19
0 192
193
194 19
5
150
155
160
165
170
175
180
185
190
195
200
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
2/30
/210
2
Mar
-12
Apr
-12
May
-12
Jun-
12
Oil and gas extraction employment is up 25.1% since Jan. 2010 as the energy sector booms. Domestic
energy production is essential to any robust economic recovery in the US.
(Thousands)
22
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
22
23
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 8.3% in
July 2012
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 15.0%
in July 2012
January 2000 through July 2012, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving
23
Jun 12
186
7921
365
127
42 15-1
09-1
465
9723
-12
-85 -58
-161
-253 -230
-257
-347
-456
-547
-734 -6
67-8
06-7
07-7
44-6
49-3
34-4
52-2
97-2
15 -186
-262
75-8
316
62
229
51 6111
714
311
2 193
128 16
711
925
726
126
410
810
2 175
5221
613
9 178 23
4 277
254
147
8511
673
172
144
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan-
07F
eb-0
7M
ar-0
7A
pr-0
7M
ay-0
7Ju
n-07
Jul-0
7A
ug-0
7S
ep-0
7O
ct-0
7N
ov-0
7D
ec-0
7Ja
n-08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-0
9Ju
n-09
Jul-0
9A
ug-0
9S
ep-0
9O
ct-0
9N
ov-0
9D
ec-0
9Ja
n-10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-1
1Ju
n-11
Jul-1
1A
ug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Monthly Change in Private Employment
January 2008 through July 2012 (Thousands)
Private Employers Added 4.65 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
172,000 private sector jobs were created in July
24
0.02
30.
011
-0.0
74-0
.132
-0.2
93-0
.546
-0.7
76-1
.033
-1.3
80-1
.836
-2.3
83-3
.117
-3.7
84-4
.590
-5.2
97-6
.041
-6.6
90-7
.024
-7.4
76-7
.773
-7.9
88-8
.174
-8.4
36-8
.361
-8.4
44-8
.428
-8.3
66-8
.222
-7.9
93-7
.942
-7.8
81-7
.764
-7.6
21-7
.509
-7.3
16-7
.188
-7.0
21-6
.902 -6.3
84-6
.120
-6.0
12-5
.910
-5.7
35-5
.683
-5.4
67-5
.328
-5.1
50-4
.916
-4.6
39-4
.385
-4.2
38-4
.153
-4.0
37-3
.964
-3.7
92
-6.6
45
-10
-8
-6
-4
-2
0
2
Dec
-07
Jan-
08F
eb-0
8M
ar-0
8A
pr-0
8M
ay-
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12F
eb-1
2M
ar-1
2A
pr-1
2M
ay-
Jun-
12Ju
l-12
Mill
ion
sCumulative Change in Private Employment: Dec. 2007—July 2012
December 2007 through July 2012 (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job losses peaked at 8.444 million
in December 2009
Cumulative job losses as of June 2012 totaled
3.792 million
25
All of the jobs “lost” since
President Obama took office in Jan.
2009 have been recouped
Private Employers Added 4.65 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
0
-8
40
86
518
259
109
-70
-212 -188
-201
-221
-230
-267
-282
-295
-349
-367
-446 -4
13
-427
-454
-475
-486
-488
-483
-487
-491
-520
-529
-538
-700
-500
-300
-100
100
300
500
700
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Cumulative Change in Government Employment: Jan. 2010—July 2012
January 2010 through July 2012* (Millions)
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
Cumulative job losses through June 2012 totaled 538,000
27
Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the
Financial Crisis, Causing Them to Reduce Staff
Government at all levels has shed more than a half
million jobs since Jan. 2010 even as private employers created 4.65 million jobs.
Temporary Census hiring distorted 2010
figures
28
Net Change in Government Employment: Jan. 2010—June 2012*
-536
-405
-72 -59
-600
-500
-400
-300
-200
-100
0
Total Local State Federal
(Thousands)
Local government employment shrank by 405,000 from Jan.
2010 through June 2012, accounting for 76% of all government job losses,
negatively impacting WC exposures for those cities and counties that insure privately
*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
State government employment fell by 1.4% since the end of 2009 while
Federal employment is down by 2.1%
29
Unemployment Rates by State, July 2012:Highest 25 States*
12
.0
10
.8
10
.7
9.8
9.6
9.6
9.3
9.1
9.1
9.0
8.9
8.9
8.8
8.7
8.5
8.5
8.4
8.3
8.3
8.3
8.3
8.3
8.2
7.9
7.7
7.6
0
2
4
6
8
10
12
14
NV RI CA NJ NC SC GA MS NY MI DC IL FL OR CT WA TN AL AZ CO KY US IN PA AK LA
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for July 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change.
FL’s unemployment is above the US rate
of 8.3%
30
7.6
7.5
7.4
7.3
7.3
7.2
7.2
7.2
7.0
6.8
6.6
6.4
6.4
6.3
6.1
6.0
5.9
5.8
5.6
5.4
5.3
5.0
4.9
4.4
4.0
3.0
0
2
4
6
8
ME ID WV AR WI MO OH TX MD DE NM HI MT KS MA UT VA MN WY NH IA VT OK SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates by State, July 2012: Lowest 25 States*
*Provisional figures for July 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had
decreases, and 4 states had no change.
31
US Unemployment Rate Forecast
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
%
6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
9.7
%
9.6
%
9.6
%
8.9
%
9.1
%
9.1
%
8.7
%
8.3
%
8.2
%
8.2
%
8.1
%
8.0
%
8.0
%
7.9
%
7.7
%
9.6
%4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
Rising unemployment eroded payrolls
and workers comp’s
exposure base.
Unemployment peaked at 10% in
late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/12 edition); Insurance Information Institute.
2007:Q1 to 2013:Q4F*
Unemployment forecasts have been revised slightly
upwards for 2012 and 2013. Optimistic scenarios put the
unemployment as low as 8.0% by Q4 of this year.
Jobless figures have been revised
slightly upwards for 2012/13
32
US Unemployment Rate Forecasts
8.2% 8.1%
7.9%7.7%
7.5%7.3%
8.3%8.3% 8.3%8.3%
8.0%
8.2%8.1%
8.0%
7.7%7.6%
8.0%8.1%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4
10 Most PessimisticConsensus/Midpoint10 Most Optimistic
Unemployment will remain high even under the most optimistic of scenarios, but
forecasts are being revised downwards
Sources: Blue Chip Economic Indicators (8/12); Insurance Information Institute
Steadily Decreasing Unemployment Should Benefit theWorkers Comp Exposure Base at Least Through 2013
Quarterly, 2012:Q2 to 2013:Q4
33
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2012:Q2
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,750
$7,00005
:Q1
05:Q
2
05:Q
3
05:Q
4
06:Q
1
06:Q
2
06:Q
3
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
Prior Peak was 2008:Q1 at $6.60 trillion
Latest (2012:Q2) was $6.89 trillion, a new peak--$640B
above 2009 trough
Recent trough (2009:Q3) was $6.25 trillion, down
5.3% from prior peakGrowth rates in 2012
Q1:12 over Q4:11: 1.8%Q2 over Q1: 1.4%
Pace of payroll growth is slowing
in 2012
33
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
34
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2012E
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
+9% in 2012E
35
POSITIVE LABOR MARKET DEVELOPMENTS
Key Factors Driving Workers Compensation Exposure
35
36
Mass Layoff Announcements,Jan. 2002—June 2012*
*Seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.
500
1,000
1,500
2,000
2,500
3,000
3,500
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Mass layoff announcements peaked at more than 3,000 per
month in Feb. 2009
There were 1,317 may layoffs announced in June 2012, close to pre-recession levels
37
Average Weekly Hours of All Private Workers, Mar. 2006—June 2012
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.
33.5
33.6
33.7
33.8
33.9
34.0
34.1
34.2
34.3
34.4
34.5
34.6
34.7
34.8
'06 '07 '08 '09 '10 '11 '12
Hours worked totaled 34.5 per week in June,
still shy of the 34.6 hours typically worked
before the “Great Recession”
Hours worked plunged during the recession,
impacting payroll exposures
(Hours Worked)
38
Average Hourly Wage of All Private Workers, Mar. 2006—June 2012
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.
$18.00
$19.00
$20.00
$21.00
$22.00
$23.00
$24.00
'06 '07 '08 '09 '10 '11 '12
The average hourly wage was $23.50 in June, up
10.6% from $21.25 when the recession began in
Dec. 2007Wage gains continued during the
recession, despite massive job losses
(Hourly Wage)
39
ADVERSE LONG-TERMLABOR MARKET DEVELOPMENTS
Key Factors Harming Workers Compensation Exposure and the
Overall Economy
39
40
Duration of Unemployment, June 2011 vs. June 2012
Source: US Bureau of Labor Statistics at http://www.bls.gov/news.release/empsit.a.htm; Insurance Information Institute.
3,068 2,976
1,874
6,263
2,810 2,826
1,811
5,370
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Less Than 5 Weeks 5-14 Weeks 15-26 Weeks 27 Weeks +
June 2011 June 2012
The plight of the long-term unemployed
remains a serious issue for the US. Skills
atrophy over time—impact on WC claim frequency/severity?
(Thousands)
-8.4% -5.0%
-3.4%
-14.3%
41
Labor Force Participation Rate,Jan. 2002—June 2012*
*Defined as the percentage of working age persons in the population who are employed or actively seeking work.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://data.bls.gov/timeseries/LNS11300000; National Bureau of Economic Research (recession dates); Insurance Information Institute.
62
63
64
65
66
67
68
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Large numbers of people are exiting (or not returning to the
labor force
Labor force participation
continues to shrink despite a falling
unemployment rate
Labor Force Participation as a % of Population
42
Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst.
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).
There were 821,000
discouraged workers in June 2012
Thousands
“Discouraged Workers” are people who have searched for work for so long in vain
that they actually stop searching and drop out of
the labor force
Number of “Discouraged Workers,”Jan. 2002—June 2012
Large numbers of people are exiting
(or not returning to) the labor force
Workers Compensation Operating Environment
54
The Weak Economy and Soft Market Have Made the Workers Comp Operating
Increasingly Challenging
54
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.2
94.8
101.299.5
101.0
107.5
102.0102.0
111.1112.3
122.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
P
12
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2012F*
Commercial lines underwriting
performance in 2011 was the worst since 2002
55
Workers Compensation Combined Ratio: 1994–2012F
10
2.0
97
.0 10
0.0
10
1.0
11
0.9
11
0.0
10
7.0
10
2.7
98
.4 10
3.6
10
4.4 1
10
.6 11
6.8
11
5.0
11
6.01
21
.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F
Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They
Have Been in a DecadeSources: A.M. Best (1994-2010 all carriers); NCCI for 2011 (Private carriers only); 2012 (All Carriers) Insurance Information Institute. 56
57
* Benefits paid during calendar year to injured workers and to providers of their medical care.**Costs are employer expenditures for WC benefits, associated administrative costs and insurance premiums. Includes self-insured employers and payments of benefits under large insurance programs.Sources: National Academy of Social Insurance (1980-2010); Insurance Information Institute estimates for 2011-2012.
Workers Comp Benefits* and Costs** per $100 of Covered Wages, 1980-2012F
1.781.67
1.581.50 1.49
1.64
1.791.86
1.942.04
2.18 2.16 2.13 2.17
2.05
1.83
1.66
1.491.38 1.35 1.34
1.43
1.57
1.71 1.70 1.71
1.561.45
1.33 1.291.23 1.25
1.32
0.96 0.971.04 1.05 1.09
1.171.23
1.29 1.34
1.461.57
1.65 1.65
1.531.47
1.351.26
1.17 1.13 1.121.06 1.10 1.13 1.16 1.13 1.09
0.99 0.95 0.97 1.02 0.99 1.01 1.01
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12F
Employer Costs Benefits Paid
(Dollars per $100 of Covered Wages) WC costs to employers began to rise in 2011/12 for the first
time since 2003
58Sources: National Academy of Social Insurance (1980-2010); Insurance Information Institute estimates for 2011-2012.
Workers Comp Medical and Cash Benefits per $100 of Covered Wages, 1980-2012F
0.68 0.68 0.70 0.71 0.730.78 0.80 0.82 0.84
0.890.94
0.990.96
0.87 0.89
0.810.76
0.680.65 0.63
0.60 0.60 0.61 0.61 0.61 0.59
0.520.49 0.48
0.52 0.51 0.52 0.52
0.28 0.290.32 0.34 0.36
0.390.43
0.470.50
0.570.62
0.660.69
0.66
0.580.54
0.50 0.48 0.48 0.48 0.470.50 0.52
0.55 0.53 0.51 0.490.46
0.49 0.510.48 0.49 0.49
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12F
Cash (Wage) Benefits Medical Benefits
(Dollars per $100 of Covered Wages) Medical benefits as a share of total benefits has increased dramatically
over the pat 20 years
Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years
752.3
1747.1
0
300
600
900
1200
1500
1800
61 66 71 76 81 86 91 96 01 06 11
Inde
x V
alue
(196
1=10
0)
All Items
Medical Care
Source: Department of Labor (Bureau of Labor Statistics)
A claim that cost $1,000 in 1961 would cost nearly $17,500 based on
medical cost inflation trends over the past 51 years.
59
RENEWED PRICING DISCIPLINE
82
Is There Evidence of a Broad and Sustained Shift in Pricing?
82
89
Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2012)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
%-8
.2%
-4.6
% -2.7
%-3
.0%
-5.3
%-9
.6%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9%
-11
.0%
-6.4
%-5
.1%
-4.9
%-5
.8%
-5.6
%-5
.3%
-6.4
%-5
.2%
-5.4
% -2.9
%
2.7
% 4.4
%4
.3%
-0.1
% 0.9
%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q2:2012 was positive marking the first full
year of gains since 2003. Increases are holding steady in
2012.
(Percent)
Q2 2011 marked the 30th consecutive quarter of price
declines
90
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2012:Q2
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Percentage Change (%)
Trough = 2007:Q3 -13.6%
Peak = 2001:Q4 +28.5%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
KRW : No Lasting Impact
Pricing turned positive in Q3:2011, the first increase in
nearly 8 years; Q2:2012 renewals were up 4.3%
Trough = 2007:Q3 -13.6%
91
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2012:Q2
1999:Q4 = 100
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Upward pricing pressure is smaller for large accounts, 3.7% in
Q2:2012, vs. 4.3% for small accounts and
4.9% for medium accounts
Despite 4 consecutive quarters of gains (Q2:2012 = 4.3%),
pricing today is where is was in early 2001 (pre-9/11),
suggesting additional rate need going forward, esp. in light of
record low interest rates
92
Change in Commercial Rate Renewals, by Line: 2012:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Uniformly Upward in Q2:2012 for Only the Fourth Time Since 2003; Property Lines & Workers
Comp Leading the Way; Cat Losses and Low Interest Rates Provide Momentum Going Forward
Percentage Change (%)
4.7%5.1%
7.2%
8.3%
0.6%
3.0%3.8% 3.9% 4.1% 4.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Su
rety
Co
mm
l Au
to
Um
bre
lla
Bu
sin
ess
Inte
rru
ptio
n
Ge
ne
ral
Lia
bili
ty
EP
L
D&
O
Co
nst
ruct
ion
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rsC
om
p
Workers Comp rate increases are large than any other line, followed
by Property lines
Workers Comp Rate Changes,2008:Q4 – 2012:Q2
Source: Council of Insurance Agents and Brokers; Information Institute.
-5.5%-4.6%
-4.0%-4.6%
-3.7% -3.9%
-5.4%
-3.7% -3.4%
-1.6%
2.6%
4.1%
7.5% 7.4%8.3%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2
WC rate changes have been positive for 5
consecutive quarters, longer than any other
commercial line
(Percent Change)
INVESTMENTS: THE NEW REALITY
95
Investment Performance is a Key Driver of Profitability
Does It Influence Underwriting or Cyclicality?
95
Property/Casualty Insurance Industry Investment Income: 2000–2012F1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.0
$46.6
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12F
Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized Q1:2012 actual figure of $11.656B.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
($ Billions)
Investment earnings in 2011 were 10.3% below
their 2007 pre-crisis peak
100
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*
*Monthly, through June 2012. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Yields on 10-Year U.S. Treasury Notes have plunged to all time
record lows
100
102
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-3.1
%-2.1
%
-1.9
%
-7.3%-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
Warra
nty
Surplu
s Line
s
Med
Mal
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
102
WC is performance and therefore pricing are
very sensitive to falling interest rates
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110